In the strategy known as _____, the arbitrageur will always hold the security denominated in the currency that is the least expensive to deliver in the futures market.
A) stock index arbitrage
B) covered interest arbitrage
C) put call parity
D) interest rate parity
E) program trading

Question

Quizplus · Accepted Answer

This strategy is called covered interest arbitrage. In this strategy, the arbitrageur borrows in a low-interest rate currency, exchanges it for a higher interest rate currency, and invests in a security denominated in the higher interest rate currency. The arbitrageur hedges their currency risk by taking a futures contract to deliver the higher interest rate currency against the low-interest rate currency. To maximize their profit, the arbitrageur will always hold the security denominated in the currency that is the least expensive to deliver in the futures market. This helps them minimize the cost of hedging their currency risk.

In the Strategy Known as _____, the Arbitrageur Will Always